Sun Pharma's growth prospects look healthy; analysts positive on the stock

Majority of analysts positive on the stock; their average target price indicates an upside potential of 15 per cent

Sun Pharmaceutical Industries (Sun Pharma) reported a turnaround in the January-March quarter of the 2022-23 financial year (Q4FY23), declaring a profit after tax (PAT) of Rs 1,984 crore versus a loss of Rs 2,277 crore in Q4FY22.

However, that loss in FY22 was due to several exceptional one-time items -- with Rs 3,723.15 crore allocated to settlement of lawsuits in the US and other Exceptional Items adding up to Rs 3,935.75 crore. Adjusted for exceptional items, PAT in Q4FY22 amounts to Rs 2,155 crore, which is a year-on-year (YoY) growth of about 36 per cent. 

Adjusted for Exceptional Items, sales grew 14 per cent to Rs 10,725 crore in Q4FY23 while the US sales were up 10.5 per cent YoY, to $430 million (33 per cent of sales). Sun Pharma has launched g-Revlimid, which made a notable contribution to US generics sales.

Domestic sales for the firm were up 8.7 per cent YoY, to Rs 3,360 crore (32 per cent of sales) with 6 per cent volume growth. Emerging market sales were up 7.5 per cent YoY, to $221 million (17 per cent sales). Rest of the world sales were up 7.4 per cent YoY, to $191 million (15 per cent of sales). Specialty sales grew 28 per cent YoY, to $237 million, and growth was led by a pickup in sales of Ilumya, Cequa, and Winlevi in the US. The three are expected to continue to give strong contributions. Earnings before interest, tax, depreciation and amortisation (Ebitda) was up 21 per cent YoY to Rs 2,560 crore.

Gross margin expanded 600 basis points (bps) YoY to 78.9 per cent on better product mix while Ebitda margin expanded 150 bps YoY to 24.1 per cent. For the company, R&D costs, Other Expenses and Employee Costs rose significantly. Overall, in FY23, Adjusted Revenue, Ebitda and PAT were up by 12.4 per cent, 11 per cent and 14 per cent, respectively. 

Management guidance is for high single-digit YoY growth in revenue for FY24 while R&D expenditure is expected to be 7-8 per cent of sales. In FY23, R&D costs stood at Rs 670 crore, about 6 per cent of sales though guidance had been for above 8 per cent. This planned increase in R&D spending would focus on Deuruxotinib and Ilumya, as well as an additional study on GLP-1. The cost base for the specialty business has not changed much in FY23 versus FY22. 

The rise in Other Expenses is due to increased sales distribution and promotional cost for the branded generics segment. Sun Pharma intends to acquire Israel’s Taro Pharma, where it already owns 78.4 per cent at a cost of $38 per share for the NYSE listed firm.

The increase in goodwill for the firm in March 2023, over September 2022, is largely due to the acquisition of Concert Pharma. The Concert acquisition will be completed by Q1FY24. Concert was acquired for upfront payment of $576 million and gives Sun Pharma the control of Deuruxolitinib, which has potential for treatment of alopecia areata (baldness). 

The market responded positively to the results with the stock rising from around Rs 945 to its current levels of Rs 985 (price-to-equity ratio of about 27x) and briefly crossing above Rs 1,015.

Analysts seem to be positive in consensus with targets in the range between Rs 1,140 and Rs 1,200. According to Bloomberg, all but 3 of the 37 analysts polled since May are positive on the stock. Their average target price is Rs 1,137 apiece.